New Banks: Will RBI Relent?

March 10, 2010

A surprise element in Pranab babu’s popular Budget was the announcement that the Reserve Bank of India (RBI) is considering new banking licences for private-sector players in order to extend the ‘geographic reach’ of the banking sector.

A bunch of non-banking finance companies (NBFCs) which has been vying openly for a bank licence, immediately welcomed the announcement, while the RBI has barely suppressed its dismay. Among those who are reportedly in the race for a licence are: Shriram Capital, Sahara, Reliance Capital, the AV Birla group, Bajaj Auto group, L&T Finance, Tata Capital, Indiabulls as well as some public-sector institutions such as Exim Bank, IFCI and SIDBI.

But RBI, which has not issued a new licence after 2004, is apparently not happy. RBI deputy governor Usha Thorat’s comment to the media was: “We have to work on the eligibility criteria. It's a long process and will take some time…” Our sources say that RBI never does anything in a hurry and it certainly won’t in this case. They point to a media report which immediately pointed out that barely 6.4% of the branches of new private banks are in rural areas and would hardly fulfil the finance minister’s (FM) objective in letting in new players. But it is also possible that the FM, who is breaking from the tradition to meet the RBI Governing Board in Mumbai on 6th March, may convince it otherwise.

Having said that, RBI’s reluctance is understandable. Its choice of new banks has always been controversial. Among the new private banks of the early 1990s was Times Bank which was the first to sell out to HDFC Bank (a profitable decision for the promoters). Centurion Bank merged with Bank of Punjab in 2005 and the combination (which had acquired Lord Krishna Bank by then) was, in turn, acquired by HDFC Bank in 2008. UTI Bank gained independence only after changing its name to Axis Bank. The spectacular collapse of Global Trust Bank, say sources, almost cost a former governor his job; it is a good thing that it didn’t because he has since been rightly honoured for saving India from the global financial crisis. IndusInd Bank has gone nowhere and many forget that the RBI had granted a provisional banking licence to CRB Capital which had tumbled like a pack of cards in the mid-1990s.